Opinion

Story of a fraying capitalism

It is not an accident, Piketty says, that many will be left behind even as others become richer. The book taps into a collective anxiety, coming as it does amidst the lingering after-effects of the global crisis and slowing global growth.

By: and Date: June 6, 2014 Topic: Global Economics & Governance

This opinion was published by the Indian Express.

French economist Thomas Piketty has written a scholarly tome with the humdrum title, Capital in the 21st Century. The book has become an overnight sensation because Piketty documents an inherent tendency for ever-increasing inequality of income and wealth in capitalist economic systems. It is not an accident, he says, that many will be left behind even as others become richer. The book taps into a collective anxiety, coming as it does amidst the lingering after-effects of the global crisis and slowing global growth.

India’s capitalist dynamic — as in other emerging economies — is different from that in the richer countries that Piketty focuses on. Yet, the lessons Piketty offers should ring a cautionary bell. Indeed, even more so than in the rich countries, India could find itself in a low growth, high inequality and high insecurity trap. These are the real fears that bubble under the theatrics and ugliness of the ongoing political debate.

Piketty is not an anti-capitalist. He sees capitalism as central to the innovation and entrepreneurial risk-taking needed for economic growth. But, using conventional tools of economic analysis, he warns that there is no automatic, ultimately benign, broad sharing of income and wealth over the development process. Rather, greater inequality — which perpetuates itself over generations — is the more likely outcome. And deepening inequality can fray capitalism’s virtues.

Piketty finds that countries are on the path to “patrimonial capitalism”, with inherited wealth increasingly concentrated in few families. As long as the rich earn a return on their wealth that is somewhat greater than the country’s growth rate, inherited wealth will rise relentlessly faster than national income. This process was interrupted, and reversed, in the first half of the 20th century, because the two World Wars destroyed private wealth and then helped create the political basis for the welfare state. But, over the past three decades, the wealth-to-income ratio has steadily recovered much of the lost ground and looks set to keep rising.

The US was historically different from Europe, with a much lower role for inherited wealth. But in recent decades, it has been a leader in rising income inequality, owing to a combination of soaring salaries for “supermanagers” and rising returns on capital for the richest. These large incomes are being turned into inherited wealth, generating entrenched privilege as in Europe at the beginning of the last century. All the while, for those at the bottom of the rung, it is becoming increasingly difficult to climb the economic and social ladder. As wealth and politics reinforce each other, equality of opportunity is a fading myth.

India is at risk of forging a potentially more pernicious form of rentier capitalism. Growth in the past few decades has brought gains to most, including the poor. But there is unmistakable evidence of rising concentration of income and wealth at the very top. Piketty and Abhijit Banerjee of the Massachusetts Institute of Technology find that the share in taxable income of the very-very rich (the top 0.01 per cent) was about 2 per cent in 1999. That brought the concentration of wealth back almost to the levels prevailing in the 1920s, the era when the maharajas cornered income and wealth.

While the Indian calculations do not extend beyond 1999, all indicators point to a stepped-up rise in inequality along the same pattern as in the US and Argentina. The “booming” 2000s witnessed the emergence of Indian billionaires, up from five in the late 1990s to 55 in 2014. The ratio of billionaire-wealth-to-GDP has risen from negligible levels to the 8-10 per cent range, comparable to that in the US and the UK. Add to this soaring land values in urban and peri-urban areas, some of it benefiting lucky farmers, but much of it captured by the wealthy and influential, often in deals between politicians and businesses.

While superficially similar to that in other countries, the rise in Indian inequality reflects more pernicious forces. Government contracts and relationships play a central role in fostering India’s wealth accumulation and concentration. Influence and connectivity create access to land, construction and mining permits and so-called “public-private partnerships”. Piketty is primarily concerned that if wealth mainly passes from one generation to another, the incentives to invest and grow will be undermined. More injurious, however, than such patrimonial capitalism is India’s rentier capitalism. The lure of easy money through investment in political connections draws entrepreneurship away from productive investment and innovation while it breeds corrosive social consequences.

India is in a political crucible. As the few with access are extracting resources from the state, the popular demands for broader social provisioning are rising. The unmet demands rouse ang er and create a perennial hunger for such elusive heroes as Anna Hazare and Arvind Kejriwal.

In the middle of the last century, Europe and America addressed the social and political conflict — to varying degrees — through the rise of the welfare state. But that option is not open to India, where the government lacks the capacity to collect sufficient revenues and is not organised to deliver adequate social services. This impasse, in a theme resonant with Piketty, will not automatically resolve itself. Indeed, precisely because the government cannot provide adequate safety nets, the populist demands become more insistent. This feeds back, at best, into symbolic gestures with little real value. At worst, the symbolic gestures become the grazing ground for more cronyism.

It is possible to imagine technical solutions to pull out of this trap with sound regulation, effective taxation and smarter delivery of social services. But that will require a different politics and a different bureaucracy. None of the major political platforms, caught up in their own pettiness, have the vision to deal with these challenges.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article More on this topic

Blog Post

Hong Kong’s economy is still important to the Mainland, at least financially

Hong Kong’s current situation is important for the world in as far as its role as major offshore financial centre is key for China’s inbound and outbound investment and financing. Capital outflows from Hong Kong are especially risky given Hong Kong's so far useful but rigid monetary regime, namely a peg to the USD under a currency board

By: Alicia García-Herrero and Gary Ng Topic: Global Economics & Governance Date: August 19, 2019
Read about event

Upcoming Event

Sep
4-5
08:30

Bruegel Annual Meetings 2019

Bruegel's 2019 Annual Meetings will be held on 4-5 September and feature the launch of Bruegel's Memos to the New European Commission.

Speakers: Lorenzo Bini Smaghi, Laurence Boone, Claire Bury, Vítor Constâncio, Zsolt Darvas, Jérôme Delpech, Kris Dekeyser, Maria Demertzis, Baroness Kishwer Falkner of Margravine, Alicia García-Herrero, Mikaela Gavas, Sven Giegold, José Manuel González-Páramo, Sylvie Goulard, Pierre Heilbronn, Mathew Heim, Jamie Heywood, Yi Huang, Danuta Hübner, Korbinian Ibel, Shada Islam, Kate Kalutkiewicz, Brigitte Knopf, Bernd Lange, Christian Leffler, Päivi Leino-Sandberg, Mark Leonard, Cecilia Malmström, Stefano Manservisi, J. Scott Marcus, Ann Mettler, Ashoka Mody, Erik F. Nielsen, Jean Pisani-Ferry, Lapo Pistelli, Lucrezia Reichlin, Joakim Reiter, André Sapir, Olaf Scholz, Harriet Sena Siaw-Boateng, Philipp Steinberg, Alexander Stubb, Ezequiel Szafir, Jean-Claude Trichet, Laura Tyson, Nicolas Véron, Reinhilde Veugelers, Sabine Weyand, Thomas Wieser, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Palais des Academies, Rue Ducale 1, 1000 Brussels
Read about event

Upcoming Event

Sep
9
08:30

China-EU investment relations: Exploring competition and industrial policies

This is a closed-door workshop jointly organised by MERICS and Bruegel looking at China-EU investment relations.

Speakers: Alicia García-Herrero Topic: Finance & Financial Regulation, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Opinion

The Democrats need to have a climate-only TV debate. For Americans and for the rest of us

A series of global summits mean the months between now and November 2020 will be crucial to the future of climate change.

By: Simone Tagliapietra Topic: Global Economics & Governance Date: August 6, 2019
Read article More by this author

Opinion

The Coming Clash Between Climate and Trade

The new leaders of the European Union, who have relentlessly championed open markets, will, ironically, likely trigger a conflict between climate preservation and free trade. But this clash is unavoidable, and how Europe and the world manage it will help to determine the fate of globalisation, if not that of the climate.

By: Jean Pisani-Ferry Topic: Energy & Climate, Global Economics & Governance Date: August 1, 2019
Read article More on this topic More by this author

Opinion

A reflection on the Mercosur agreement

The EU accepts the deal because it is worried about the catastrophic scenario of a world without the WTO.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: July 26, 2019
Read article More on this topic

Blog Post

China’s investment in Africa: What the data really says, and the implications for Europe

China has clearly signalled to Europe that it does not shy away from involvement in Africa, historically Europe’s area of influence. But the nature of China’s direct investment flows to the continent will have to change if they are to prove sustainable.

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: July 22, 2019
Read about event More on this topic

Past Event

Past Event

The 4th industrial revolution: opportunities and challenges for Europe and China

What is the current status of EU-China relations concerning innovation, and what might their future look like?

Speakers: Elżbieta Bieńkowska, Chen Dongxiao, Patrick Child, Eric Cornuel, Maria Demertzis, Ding Yuan, Luigi Gambardella, Jiang Jianqing, Frank Kirchner, Pascal Lamy, Li Mingjun, Gwenn Sonck, Gerard Van Schaik, Reinhilde Veugelers, Wang Hongjian, Guntram B. Wolff, Xu Bin, Zhang Hongjun and Zhou Snow Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 12, 2019
Read article More on this topic

Opinion

What bond markets tell about China’s economy

Macro data doesn’t provide a comprehensive picture to investors, but bond issuance data can fill in some gaps.

By: Alicia García-Herrero and Gary Ng Topic: Global Economics & Governance Date: July 10, 2019
Read article Download PDF

Policy Brief

The threats to the European Union’s economic sovereignty

Memo to the High Representative of the Union for Foreign Affairs and Security Policy. The authors describe the current context and the increasing interlinkages between economics and power politics and the role to play in reinforcing and defending Europe’s economic sovereignty.

By: Jean Pisani-Ferry and Guntram B. Wolff Topic: European Macroeconomics & Governance, Global Economics & Governance Date: July 4, 2019
Read article More on this topic More by this author

Opinion

Farewell, flat world

In the last 50 years, the most important economic development has been the diminishing income gap between the richer and poorer countries. Now, there is a growing realisation that transformations in the global economy have been re-established centrally from intangible investments, to digital networks, to finance and exchange rates.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: July 2, 2019
Read article Download PDF More on this topic

Policy Contribution

Redefining Europe’s economic sovereignty

This Policy Contribution delves into the position of the EU in the current global order. China and the United States increasingly trying to gain geopolitical advantage using their economic might. The authors examine the specific problems that China and the US pose for European economic sovereignty, and consider how the EU and its member states can better protect European economic sovereignty.

By: Mark Leonard, Jean Pisani-Ferry, Elina Ribakova, Jeremy Shapiro and Guntram B. Wolff Topic: Global Economics & Governance Date: June 25, 2019
Load more posts